Stablecoins are designed to maintain a ‘stable’ fixed value but sometimes fail. How does this happen, and why? Explore the world of stablecoin depegging.
— issues DAI, an algorithmic stablecoin designed to preserve a precise 1:1 ratio with the U.S. dollar. However, DAI also fell off its peg amid the Silicon Valley Bank’s collapse, mainly due to a contagion effect from USDC’s depegging. Over 50% of the reserves backing DAI are held in USDC.
The importance of stablecoin pegs is in providing a stable and predictable value relative to an underlying asset or basket of assets — typically a fiat currency like the U.S. dollar. Stablecoins are a desirable alternative for various use cases, includingWith stablecoin pegs, traders may enter and exit positions without being subjected to the price fluctuations of cryptocurrencies like BTC or ETH.
Stablecoin pegs can also increase financial inclusion, especially for people and enterprises without access to traditional financial services. Stablecoins can be used to make payments and transact in digital assets without requiring a bank account or credit card, which can be crucial in developing and emerging markets.Stablecoins can depeg due to a combination of micro and macroeconomic factors.
On the macroeconomic front, if there is high inflation, the purchasing power of the underlying assets that support the stablecoin may drop, leading to a depeg event. Similarly, adjustments to interest rates or other macroeconomic measures may impact stablecoin demand.
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